# Market price of this stock

Please see attached file.

1. Liddy Products Inc. just issued 10-year, 8% coupon bonds at par. Oustanding Lumabugh Corp. bonds, which have a maturity of 10 years, sell at a premium to par and are viewed by investors as having the same risk as Liddy bonds. Therefore, it must be true that:

A) The coupon rate on the Limbaugh bonds is equal to the on the Liddy bonds

B) The coupon rate on the Limbaugh bonds is higher than the on the Liddy Bonds

C) The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds

D) The yield on Limbaugh bonds is higher than the yield on Liddy bonds

E) The Limbaugh bonds pay coupons more often than twice a year

2. The call premium is:

A) Equal to the par value but paid prior to maturity

B) Additional compensation paid to a bondholder in exchange for an early redemption

C) The 'thou shalts' that must be met prior to the payment of the face value at maturity

D) The additional principal paid when a bond is granted an investment grade rating

E) The same as the face value but paid prior to maturity

3. Duration is a useful measure of interest rate risk because it incorporates:

I. A bon's maturity

II. A bon's default risk

III. A bond's coupon rate

A) I only

B) II only

C) I and II only

D) I and III only

E) I, II and III

4. J&J Manufacturing just issued a bodn with $1000 face value and coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons and the yield to maturit is 6.8% what will the bonds sell for?

5. Analysts expect Marble Comics to pay shareholders $1.00 per share annually for the next five years. After that, the dividend will be $1.50 annually forever. Given a discount rate of 10% what is the value of the stock today?

6. An asset characterized by cash flows that increase at a constant rate forever is called a:

A) Growing perpetuity

B) Growing annuity

C) Common annuity

D) Perpetuity due

E) Preferred stock

7. ABC company's preferred stock is selling for $25 a share. If the required return is 12% what will be the dividend be two years from now?

8. Paradise Properties is trading at $300 per share. According to their annual report their earnings last yaer were $8, 500,000. There are 4.25 million shares of Paradise Properties outstanding. If investors require a return of 12% to invest in Paradise Properties, what percentage of that $30 per share represents the growth potential of the company?

9. You purchased a bond one year ago for $839.67 and just received the annual coupon of $81. You sell the bond today for $829.31. What is your real return if inflation was 5%?

A) 3.14%

B) 6.025%

C) 6.47%

D) 9.80%

E) 10.26%

10. If a $1000 face value 12% annual coupon bond with 9 years to maturity is trading at 1, 175 what is it's YTM?

11. You just voted against a merger proposal made by another corporation. You must own:

A) Preferred stock

B) Debentures

C) Common stock

D) Cumulative dividend stock

E) Class B stock

12. Net present value can be defined as:

A) The rate of return that causes the present value of all cash flows associated with a project to equal zero

B) The discount rate that causes the current value of cash inflows to exceed the current value of cash outflows

C) A measure of the value created or added today by undertaking a project

D) The cash outflows from a project subtracted from the cash inflows for the project

E) The net costs of a project subtracted from the net income generated from the project

13. By definition , the net present value is equal to zero when the discount rate is equal to the:

A) Crossover rate

B) Average account rate of return

C) Rate used in the discounted payback formula

D) Profitability index rate

E) Internal rate of return

14. Suppose NoGro Inc has just issued a dividend of $2.90 per share. Subsequent dividends will remain at $2.90 indefinitely. Returns on the stock firms like NoGro are currently running 15%. What is the value of the one share stock?

15. Alhandro Inc, just paid an annual dividend of $1.03. It has been increasing its dividends by 4% annually and is expected to continue doing so. How much can it expect to receive for each new share of stock offered if investors require an 11% rate of return?

16. The Extreme Reaches Corp last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After the dividend will be a constant $2.50per share per year. What is the market price of this stock if the market rate of return is 15%?

17. An advantage of the payback method is its:

A) Time value of money considerations

B) Application of readily available accounting data

C) Cut-off point

D) Long-term perspective

E) Simplicity

18. A project will produce cash inflows of $3,650 a year for four years. The start up costs are $15,000. In year five, the project will be closed and as a result should produce a cash inflow of $7,500. What is the net present value of this project if the required rate of return is 11.5 percent?

19. A manager will prefer the IRR rule over the NPV rule if the manager:

A) Prefers to talk in terms of rates of return

B) Can accurately forecast future cash flows

C) Dislikes the discounted payback analysis

D) Also prefers use of payback analysis

E) Is considering mutually exclusive projects

20. The Scott Co. Has a general dividend policy whereby it pays a constant annual dividend of $1 per share of common stock. The firm has 1,000 shares of stock outstanding. The company:

A) Must always show a current liability of $1,000 for dividends payable

B) Is obligated to continue paying $1 per share per year

C) Will be declared in default and can face bankruptcy if it does not pay $1 per year to each shareholder on a timely basis

D) Has a liability which must be paid at a later date should the company miss paying an annual dividend payment

E) Must still declare each dividend before it becomes an actual company liability

21. Currently available interest rates are 4% for a one year term deposit and 6% for a 2 year term deposit. To the nearest percent, what one year forward rate would be implied by this term structure?

A) 5%

B) 6%

C) 7%

D) 8%

E) 9%

22. The reduction in the sale of hamburgers when hot dogs are added to a menu is called the ____ cost

A) Sunk

B) Opportunity

C) Incremental

D) Stand-alone

E) Erosion

23. A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $35,000 and inventory by $30,000. Which of the following is true?

A) Net working capital has increased

B) Sales will increase

C) Payments to creditors will slow

D) Net working capital has decreased

E) This is a net source of cash

24. Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20and $1.30, respectively. This pattern is expected to continue into the future. This is an example of a company paying a:

A) Dividend that grows by 10 percent each yar

B) Dividends that grows at a constant rate

C) Dividends that grows by a decreasing amount

D) Dividends that grows at decreasing rate

E) Preferred stock dividend

25. DDT's most recent dividend was $5.00. The firm is experiencing financial difficulties and dividend growth is expected to slow to 2% per year for the next five years before the company returns to its long term growth rate of 5%. If investors have a required rate of return of 11%, at what price should DDT be trading?

A) $62.89

B) $64.15

C) $75.36

D) $76.87

E) $87.50

https://brainmass.com/business/capital-budgeting/market-price-of-this-stock-196474

#### Solution Preview

1. Liddy Products Inc. just issued 10-year, 8% coupon bonds at par. Oustanding Lumabugh Corp. bonds, which have a maturity of 10 years, sell at a premium to par and are viewed by investors as having the same risk as Liddy bonds. Therefore, it must be true that:

A) The coupon rate on the Limbaugh bonds is equal to the on the Liddy bonds

B) The coupon rate on the Limbaugh bonds is higher than the on the Liddy Bonds

C) The coupon payment on the Limbaugh bonds is lower than that on the Liddy bonds

D) The yield on Limbaugh bonds is higher than the yield on Liddy bonds

E) The Limbaugh bonds pay coupons more often than twice a year

B) The coupon rate on the Limbaugh bonds is higher than the on the Liddy Bonds

2. The call premium is:

A) Equal to the par value but paid prior to maturity

B) Additional compensation paid to a bondholder in exchange for an early redemption

C) The 'thou shalts' that must be met prior to the payment of the face value at maturity

D) The additional principal paid when a bond is granted an investment grade rating

E) The same as the face value but paid prior to maturity

B) Additional compensation paid to a bondholder in exchange for an early redemption

3. Duration is a useful measure of interest rate risk because it incorporates:

I. A bon's maturity

II. A bon's default risk

III. A bond's coupon rate

A) I only

B) II only

C) I and II only

D) I and III only

E) I, II and III

D) I and III only

4. J&J Manufacturing just issued a bond with $1000 face value and coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons and the yield to maturity is 6.8% what will the bonds sell for?

Its $1025. (Please see attached excel file for calculations)

5. Analysts expect Marble Comics to pay shareholders $1.00 per share annually for the next five years. After that, the dividend will be $1.50 annually forever. Given a discount rate of 10% what is the value of the stock today?

Its $13.1. (Please see attached excel file for calculations)

6. An asset characterized by cash flows that increase at a constant rate forever is called a:

A) Growing perpetuity

B) Growing annuity

C) Common annuity

D) Perpetuity due

E) Preferred stock

A) Growing perpetuity

7. ABC company's preferred stock is selling for $25 a share. If the required return is 12% what will be the dividend be two years from now?

Its = Preferred ...

#### Solution Summary

This explains the steps to compute the market price of this stock

FIN500 Graduate Case- Cost of Capital

annual interest at a 12% coupon rate. As a result of current interest rates, the bonds can be sold for $1,010 each. Flotation costs of $30 per bond will be incurred in the process (which implies that

f = 2.97%, or 0.0297 in decimal form) and the firm is in a 40% tax bracket.

a. Find the net proceeds from the sale of each bond for Warren Industries.

b. Calculate the before-tax and the after-tax cost of debt for Warren Industries.

2. Drywall Systems, Inc., is presently in discussions with its investment bankers regarding the issuance of new bonds. The investment banker has informed the company that different maturities will carry different coupon rates and sell at different prices. Drywall Systems must choose among several alternatives. In each case, the bonds will have a $1,000 par value and flotation costs will be $30 per bond. This implies that the firm will net $970 per bond, before the adjustment for the premium (+) or discount (-). The company is taxed at a rate of 40%. Calculate the after-tax costs of financing with each of the following alternatives.

Alternative Coupon Rate Time to Maturity Premium (+) or Discount (-)

A 9% 16 years + $250

B 7% 5 years + $50

C 6% 7 years Par

D 5% 10 years - $75

3. Gem Systems has recently issued preferred stock. The stock has a 12% annual dividend based on a par value of $100 per share. The stock is currently selling for $97.50 per share in the secondary market (so that Po = $97.50). Finally, flotation costs of $2.50 must be paid for each new share Gem Systems issues.

a. Calculate the cost of preferred stock based on the outstanding issue, given the current market price.

b. If Gem Systems sells a new issue of preferred stock carrying a par value of $100 but with an annual dividend of 10% of par, what is the cost of this newly issued preferred stock if the firm nets $90.00 per share after flotation costs?

4. Calculate the cost of preferred stock (rPS) for each of the following:

Preferred Stock Par Value Current Price (Po) Flotation Cost Annual Dividend

(% of Par)

A $100 $101 $9.00 11%

B $40 $38 $3.50 8%

C $35 $37 $4.00 $5.00

D $30 $26 5% of par $3.00

E $20 $20 $2.50 9%

5. JPM Corporation common stock has a beta of 1.2. The risk-free rate is 6%, and the market return is 11%.

a. Derive the risk premium on JPM common stock.

b. Determine JPM's cost of common equity using the CAPM.

6. Reynolds Textiles wants to measure its cost of common equity. The firm's stock is currently selling for $57.50 per share. The firm expects to pay a $3.40 dividend at the end of 2011 (so assume that

D1 = $3.40 for purposes of calculation). The dividends for the last 5 years are as follows:

Year Dividend

2010 $3.10

2009 $2.92

2008 $2.60

2007 $2.30

2006 $2.12

After incurring flotation costs, Reynolds Textiles expects to net $52 per share on a new issue.

a. Determine the growth rate of dividends (g).

b. By applying the constant-growth valuation model, determine the cost of retained earnings common equity (rs).

c. By applying the constant-growth valuation model, determine the cost of newly-issued common equity (re).

7. Brite Lighting Corporation wants to investigate the effect on its cost of capital based on the rate at which the company is taxed. The firm wishes to maintain a capital structure of 30% debt, 10% preferred stock, and 60% common stock. The cost of financing with retained earnings is 14% (i.e.,

rs = 14%), the cost of preferred stock financing is 9% (rps = 9%), and the before-tax cost of debt is 11% (rd = 11%). Calculate the weighted average cost of capital (WACC) given the tax rate assumptions in parts (a) to (c) below.

a. Tax rate = 40%.

b. Tax rate = 35%.

c. Tax rate = 25%.